I am Forbes' Opinion Editor. I am a Senior Fellow at the Manhattan Institute for Policy Research, and the author of How Medicaid Fails the Poor (Encounter, 2013). In 2012, I served as a health care policy advisor to Mitt Romney. To contact me, click here. To receive a weekly e-mail digest of articles from The Apothecary, sign up here, or you can subscribe to The Apothecary’s RSS feed or my Twitter feed. In addition to my Forbes blog, I write on health care, fiscal matters, finance, and other policy issues for National Review. My work has also appeared in National Affairs, USA Today, The Atlantic, and other publications. I've appeared on television, including on MSNBC, CNBC, HBO, Fox News, and Fox Business. For an archive of my writing prior to February 2011, please visit avikroy.net. Professionally, I'm the founder of Roy Healthcare Research, an investment and policy research firm. In this role, I serve as a paid advisor to health care investors and industry stakeholders. Previously, I worked as an analyst and portfolio manager at J.P. Morgan, Bain Capital, and other firms.

CBO Guesstimates that the Supreme Court's Impact on Obamacare is Modest

Rep. Tim Murphy (R., Penn.) has sponsored the CBO Transparency Act, a bill that would require CBO to publish its methodologies for public scrutiny. (Photo credit: Wikipedia)

Today, the Congressional Budget Office released its post-Supreme Court estimates of Obamacare’s impact on the deficit. The headline is that the CBO estimates that states opting out of Medicaid will reduce the deficit by $84 billion from 2012-2022, compared to its previous estimate, and result in 3 million fewer people gaining coverage from the law. The CBO also estimated that repealing the law would be less costly than previously assumed. Let’s scratch under the surface and see what we can glean about the CBO’s thinking.

“CBO and [the Joint Committee on Taxation] now anticipate that some states will not expand their programs at all or will not expand coverage to the full extent authorized by the ACA,” CBO Director Douglas Elmendorf writes. “CBO and JCT also expect that some states will eventually undertake expansions but will not do so by 2014 as specified by the ACA.” CBO now projects that the insurance coverage provisions of the law will cost $1,168 billion from 2012-2022, compared to a previous estimate of $1,252 billion.

But what are the assumptions behind this projection? A lot of guesswork. “What states will be able to do and what they will decide to do are both highly uncertain,” writes Elmendorf. “As a result, CBO and JCT’s estimates reflect an assessment of the probabilities of different outcomes (without any explicit prediction of which states make which choices) and are, in their judgment, in the middle of the distribution of possible outcomes.”

Yuval Levin and Jim Capretta have made the case that the Supreme Court’s decision that the mandate is a tax, and not a penalty, will mean that fewer people will comply with the mandate. Elmendorf disagrees. “CBO and JCT’s original assessment of the effects of the coverage requirement was strongly rooted in comparisons with other taxes and penalties, drawing heavily from the academic literature on tax compliance…CBO and JCT continue to expect similar behavioral responses to the insurance requirement.”

Coverage under the exchanges is 50% more costly than Medicaid

Key to the CBO’s math is their guess that 6 million fewer people will enroll in Medicaid or its cousin, the Children’s Health Insurance Program (CHIP), while 3 million more people will sign up for the law’s subsidized exchanges for private insurance.

The average person enrolled in the Medicaid expansion will cost $6,000 in 2022, whereas the average person enrolled in an exchange will cost around $9,000. As a result, people who sign up for the exchanges, who would have previously been signed up for Medicaid, will cost the government more money. That means that in 2022, the government (including state matching funds) will save $37 billion on Medicaid while spending an additional $28 billion on the exchanges, for a net savings of $9 billion.

The CBO’s result isn’t surprising. When I spoke to plugged-in people on Capitol Hill after John Roberts handed down his decision, they said that CBO was continuing to assume that states would participate in the Medicaid expansion. It’s a defensible point of view—after all, there isn’t a long history of state governments turning down federal funds—but this case may be the exception that proves the rule.

Now that several governors have come out against the Medicaid expansion, the CBO has budged a bit in their direction. “CBO anticipates that, instead of choosing to expand Medicaid eligibility fully to 138 percent of the [federal poverty level] or to continue the status quo, many states will try to work out arrangements with the Department of Health and Human Services (HHS) to undertake partial expansions. For example, some states will probably seek to implement a partial expansion of Medicaid eligibility to 100 percent of the FPL, because, under the ACA, people below that threshold will not be eligible for subsidies in the insurance exchanges.” If all states were allowed to do this without any pushback from Washington, the impact to the deficit could be in the trillions.

CBO assumes that around a third of the people eligible for the Medicaid expansion—the 6 million described above—will not enroll in Medicaid due to state opt-outs. They assume that a third of the overall 18 million will reside in states that fully expand Medicaid; half in states that partially expand Medicaid, and a sixth in states that opt out entirely.

Furthermore, the CBO estimates that of the 6 million who won’t get Medicaid, one quarter would have been eligible for Medicaid prior to Obamacare: the increasingly infamous “woodwork” population. Of the remaining three-quarters (4.5 million), one-third (1.5 million) are also eligible for the exchanges, because their income is above 100 percent of the federal poverty level.

Repealing the law will be cheaper than previously estimated

The CBO also predicted that repealing Obamacare would increase the deficit by $109 billion over the 2013-2022 period, a smaller figure than its 2011 estimate that repeal would increase the deficit by $145 billion from 2012-2019. Note that the new estimate covers an 10-year period, whereas the prior one covered an 8-year period.

According to CBO, the new repeal bill would reduce direct spending by $890 billion from 2013-2022, but also reduce tax revenue by $999 billion, leading to a net increase in the deficit of $109 billion. Part of the challenge, says CBO, is that “some provisions [of the law] cannot be retroactively adjusted. For example, payment rates and subsidized benefits in the Medicare Advantage program and the Part D prescription drug program…were established in negotiated contracts.”

But the biggest reason, as the charts below show, is that the law’s tax increases continue to go up after 2018, whereas the CBO expects the law’s spending to level off after 2018. This, in large part, is due to Obamacare’s “Cadillac tax” against high-value health insurance plans, that will affect an increasing number of Americans as time goes on. The CBO’s view appears to make generous assumptions about future economic growth, given the law’s substantial tax hikes and the overall condition of the economy.

Are the CBO’s projections biased?

Matthew Boyle of the Daily Callersuggests that CBO estimates might have a liberal bias. A senior health-care analyst at CBO, Melinda Buntin, “personally donated more than $26,000 to Democratic politicians and campaign committees,” including President Obama, and served as an Obama spokeswoman in 2008. Moreover, the Daily Caller notes a Boston Globereport that Buntin’s parents have donated almost $600,000 to Democrats since 2007.

A follow-up report from the Daily Caller indicates that several Republican senators sought to terminate Buntin’s involvement with CBO, but that CBO Director Douglas Elmendorf successfully lobbied Congress in her defense.

“In preparing its cost estimates and other analyses, CBO uses data and other information from a wide variety of sources, consults with outside experts representing a variety of perspectives, applies a rigorous internal review process that involves multiple people at different levels of the organization, and enforces strict rules to prevent conflicts of interest,” Elmendorf told the Daily Caller. “We have the utmost confidence in the objectivity of the work that CBO produces.” According to Elmendorf, Buntin was not a significant player in today’s reports.

I don’t think the CBO seeks to advance a partisan agenda. And just because someone donates to one party or the other doesn’t automatically mean her work is biased. But I do think that many of the CBO’s key assumptions tend to favor government over market reforms.

The CBO’s health care projections are predominantly influenced by the work of one economist: MIT’s Jonathan Gruber, who happens to have been a key architect of Obamacare. “We knew the numbers he gave us would be close to where the CBO was likely to come out,” said Obama health-care adviser Neera Tanden, reflecting on the design of Obamacare.

It’s high time for full CBO transparency

Ideally, the CBO would publish its economic models, so that independent economists could road-test their assumptions. But the CBO refuses to allow it. For this reason, seven House members, led by Tim Murphy (R., Penn.), have introduced the CBO Transparency Act. It’s a simple, two-page bill that requires the CBO Director to “post on the public website of the Congressional Budget Office all working papers, including data, informational papers, methodologies, spreadsheets, computer programs, background data, revenue estimates, and aggregate data provided by the Joint Committee on Taxation, and any other material used to derive such cost estimate.”

It’s not clear to me why the CBO is afraid of transparency. Shielding its models from the public invites accusations of partisan bias. The CBO’s projections have such a huge impact on Congressional legislation that the public interest in scrutinizing CBO’s methodology far outweighs any countervailing concerns.

“Today, you can access government data on everything from hospital visits, crop yields, and air quality levels, which are used to produce major regulations by the EPA,” said Rep. Murphy. “CBO is an outlier in an era of transparency.” Tim Murphy is right: it’s time for the CBO to join the modern world.

It is equally important that the CBO described what it did not do. It did not (a) identify which states will or will not expand Medicaid, (b) which states will do so in 2014 (versus later), or (c) which states will undertake full expansions. Thus, the CBO estimates are not the result of a scenario, but rather the average of a large number of possibilities — in short, they’re highly uncertain. In contrast, our AAF estimates correspond to specific states and specific populations.

The CBO also did not include in its analysis the impact of the maintenance-of-effort provisions, instead assuming that states would not take advantage of the optional nature of the Medicaid expansions to reduce their rolls after 2014. To the extent that states shift from Medicaid to the exchanges, the cost will go up.

Finally, the CBO’s analysis focuses only on the direct impact of the coverage provisions (Medicaid, exchange subsidies, penalty taxes), and not interactions with the remainder of the law. Put differently, this does not constitute a comprehensive re-estimate of the cost of the ACA.

An interesting feature of the report is that the CBO estimates that the ACA will cut Medicare spending by $741 billion over the next 10 years, up from the roughly $500 billion advertised at passage (see page 5, table 2 — Medicare and Other Medicaid and CHIP Provisions). This change reflects both the fact that the budget window is different, and that in the absence of cuts, Medicare is growing quite rapidly. Accordingly, the size of the cuts are growing rapidly as well.

The final aspect of the CBO analysis, contained in a letter to Speaker Boehner, is that repeal of the ACA will increase the deficit by $109 billion over 10 years. Interestingly, $95 billion is “off-budget” savings — CBO parlance for Social Security taxes. Put differently, the ACA is budgetarily “sound” only because of higher taxes — no health-care savings in sight.

The bottom line: The CBO report is unsurprising and does not shed much real light on the actual future impact of the ACA on the federal budget. It does reinforce the basic bad news: no real bending of the cost curve, necessitating higher taxes and large Medicare cuts to make the numbers add up.

Back in 2009, early versions of the Senate’s health reform bill included what was known as a Bridge Policy: people between 100 percent and 138 percent of the federal poverty level could choose whether they wanted to enroll in Medicaid or go through the marketplaces and purchase private insurance with a federal tax subsidy. That’s why the Medicaid threshold was capped at 138 percent, and the tax subsidy threshold initially started at 100 percent. (A sidenote: The ACA officially sets Medicaid eligibility at 133 percent of the federal poverty level. But the statute also allows for wiggle room of 5 percent, up to 138 percent, and that is the threshold that will be used for Medicaid enrollment in 2014.)

Sources said the policy was offered as an olive branch to Republicans, who were wary of the government-run Medicaid program growing too large. The GOP preferred funneling more people to private insurance. An early iteration of the Bridge Policy was present in policy options submitted jointly by Sen. Max Baucus and Sen. Chuck Grassley to the Senate Finance Committee in May 2009. The policy in its final form (with the 100 and 138 percent thresholds) was part of the bill approved by the committee on Oct. 13, 2009.

But it was also more expensive for the federal government. Medicaid, which is funded jointly by the states, costs Uncle Sam less than the tax subsidies, which are fully funded by the feds. So it would be cheaper to just enroll everyone below 138 percent of the federal poverty level in Medicaid, rather than give them a choice. And that’s why the Bridge Policy was ultimately discarded: The authors wanted to keep the ACA’s price tag down.

When the Congressional Budget Office (CBO) came back with estimates of the bill’s costs, Senate staff decided the Bridge Policy was too costly to keep in the bill. No one can say for certain what the exact cost would have been, and the CBO analysis of the Bridge Policy was never released publicly. One source recalled that the Bridge Policy would have cost the federal government an additional $50 billion over 10 years. Another said that number was “too high,” but acknowledged that the costs were in the billions.

So the Bridge Policy was eliminated when the Finance Committee bill merged with the health reform bill from the Health, Labor, Education and Pensions committee, one source said. That merged bill was sent to the Senate floor. Instead, the Medicaid expansion was supposed to cover everyone below 138 percent of the federal poverty level, while the tax subsides were intended to cover everyone above that. A manager’s amendment reworked much of the ACA’s language, incorporating changes to nearly every section of the bill from the floor debate and accompanying backroom negotiations. That’s the bill that was passed by the Senate on Dec. 24, 2009.

But the tax subsidy threshold was never revised from 100 to 138 percent after the Bridge Policy had been removed, as it logically should have been. That was an unintentional oversight, said sources who spoke with Governing. How did they miss it while the bill was being rewritten? It appears to be as simple as this: The Bridge Policy and the tax subsidy section of the Senate Finance bill are separated by more than 100 pages. When one section was changed, nobody remembered to check the other.

“I don’t want to imply that people were being sloppy. But when you take out the Bridge Policy, you’ve got to check in 20 different places to make sure everything matches,” one Senate staffer said. “This stuff was happening so quickly, and, at the end, it was quite messy.”

The messiness of the ACA’s final days in Congress are well known. It was complicated after Democrats lost a seat in the Senate in January 2010 when Republican Scott Brown was elected in the Massachusetts special election to fill Ted Kennedy’s seat. Brown’s commitment to filibuster a conference bill, which would have reconciled differences between the Senate and House bills, meant that Democrats in the Senate couldn’t pass revised legislation as they traditionally would.

Instead, the Senate bill was passed as-is by the House on Feb. 25, 2010. That legislation was signed by the president on March 23, 2010, with the mistake still intact. The House then passed a separate bill that amended some of the ACA’s language, but didn’t address the discrepancy between the Medicaid and tax subsidy thresholds. It’s possible they couldn’t be changed because of procedural rules, one source said. Regardless, the Senate passed the latter bill on March 25, 2010, and Obama signed it five days later.

Even then, the error shouldn’t have mattered. As long as the Medicaid expansion was mandatory, the in-betweeners would simply be enrolled into Medicaid. But the Supreme Court’s decision last June changed that.

The irony here is that the mistake actually edges the ACA a little closer to its initial goal of universal health coverage — as one Senate staffer called it, it’s “a happy coincidence.” But no one could have predicted that outcome — not the authors, not the bill’s opponents, not independent legal analysts. (As one source explained, if the goal had been to create a fallback Plan B in case the Medicaid expansion was completely tossed by the Court, the bill’s authors would have set the tax subsidy threshold at 0 percent of the federal poverty level rather than 100 percent, so that everybody would be covered.)

The statutory error, paired with the Supreme Court decision that made it matter, will also force the feds to spend their ACA dollars a little differently. A CBO analysis after the Supreme Court decision estimated that the federal government would spend an additional $210 billion on tax subsidies by 2022, although those costs were offset by $289 billion in savings on Medicaid.

But the law’s authors chose to focus on the upside. Depending on how many states don’t expand Medicaid, as many as 3 million Americans will still get health coverage thanks to what seems to have been an honest mistake.

“It didn’t really matter until June,” said one Senate staffer. “Then we all said, ‘Wait a second. What about that leftover thing from the Bridge Policy?’ So I guess you could say it was fortuitous or lucky.”

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

CBO also notes at the end that because the additional enrollees will be less healthy on average than those previously expected to enroll, “the premiums for health insurance offered in the exchanges, along with premiums in the individual market, will be 2 percent higher than those estimated in March 2012.” For the average family of four paying $15,000 per year in premiums, that is potentially a $300 increase. Not huge, but not nothing, either.

The Republican author did his best to bury the good news deep in the article…but here it is: The CBO also predicted that repealing Obamacare would increase the deficit by $109 billion over the 2013-2022 period, a smaller figure than its 2011 estimate that repeal would increase the deficit by $145 billion from 2012-2019.

That’s right. The Republicans in Congress who are all voting to repeal Obamacare know that if Obamacare falls they will be INCREASING THE NATIONS BUDGET DEFICIT by $109 billion dollars over 10 years.

You heard right. Republicans are voting to INCREASE THE BUDGET DEFICIT.

That’s exactly the opposite of what they have been saying for months…that OBAMACARE will increase the deficit by trillions of dollars.

Nice try at a convoluted spin on an OBAMACARE VICTORY. Now we know 1. Obamacare is LEGAL 2. Obamacare will REDUCE the federal deficit $89 billion dollars 3. Republican REPEAL of OBAMACARE will INCREASE the federal deficit by $109 billion dollars. 4. A vote to Repeal Obamacare is a vote to INCREASE THE DEFICIT

I would rather the healthcare law cost a little more and everyone in the US get covered. It is shameful that a rich country like ours can not provide healthcare to everyone. If South Korea, Japan and Singapore can do it, why not us? Is starting wars and killing people with drones the only thing we can beat the rest of the world at?

The selfish republicans of course don’t care if 3 million or even 50 million Americans are without healhcare coverage – they only care about there own skins and their own tax cuts – especially for the rich

Texas is already like a third world country – lots of rich people and many poor without healthcare, homeless, many malnourished and undereducated – Perry is very proud. The only thing he has accomplished is stealing jobs from other states – just like China.

Unfortunately the CBO estimates are limited to what is written in the legislation and not what Congress actually does. Prior projections of $210B in savings were more than wiped out by restoring $250B in cuts to Medicare reimbursement which Congress does every year in annual increments. Healthcare legislation, like Dodd-Frank, leaves too much to bureaucrats to create rules and on Congress to follow through. Neither have a terribly good track record.